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What the Pension Benefit Guaranty Corporation Can Learn from the Federal Savings and Loan Insurance Corporation

This paper attempts to draw attention to some important lessons that the Pension Benefit Guaranty Coroporation (PBGC) can learn from the experience of the Federal Savings and Loan Insurance Corporation (FSLIC). FSLIC was the government agency that insured deposits at savings and loan associations until it was replaced in 1989 leaving a massive deficit to be financed by taxpayers. Like FSLIC, the PBGC is a government agency that guarantees a form of private corporate debt. As guarantor of the pension benefits promised by private plan sponsors, the PBGC bears the risk of a shortfall between the value of insured benefits and the assets securing those benefits.

The magnitude of the the PBGC's exposure to shortfall risk depends on three factors:

- the financial strength of plan sponsors,

- the degree of underfunding of insured benefits,

- the mismatch between the market-risk exposure of insured benefits and the assets securing them.

Only the first two of these have been addressed by past legistlative reforms. The third factor appears not to be well understood. It is apparently a widespread belief among policymakers that a well-diversified pension portfolio of equity securities provides an effective long-run hedge against liabilities of defined-benefit pension plans, so that there is no mismatch problem. This belief is mistaken. The policy based upon it creates the potential for large shortfall losses to the PBGC. Therein lies an uncomfortable parallel with the S&L debacle of the 1980s.